Proposed Amtrak Bailout Would Bust the Budget

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Threatening to erode the already shrinking budget
surplus are two costly proposals to bail out Amtrak, America's
perennially troubled, government-subsidized passenger rail service.
Amtrak's supporters have begun to push this initiative more
forcefully since September 11 amidst bipartisan efforts to deal
with the genuine dislocation caused by the terrorist attacks.
Despite growing concern that the level of federal spending may
eliminate the surplus, Amtrak proponents hope to use the recent
events to divert billions of federal dollars from other priorities,
such as pro-growth economic measures, into an enterprise that has
failed to meet the government's mandate to become
self-sufficient.

Better than another costly bailout would
be to require specific reforms that would end Amtrak's subsidies in
fiscal year (FY) 2003, as required by law, make Amtrak's management
more accountable, and require the consideration of all proposals
(including privatization) to make the service more cost-effective
and responsive to market demands.

Two Costly
ProposalsThe costliest of the recent proposals to bail out is the
Amtrak High Speed Rail Act of 2001,1 introduced by Senator Joseph
Biden (D-DE) as S. 250 and by Representative Amory Houghton (R-NY)
as H.R. 2329. This bill would provide a new tax credit for
investors willing to lend Amtrak as much as $1.2 billion per year
in each of the next 10 years. According to a recent analysis by the
U.S. General Accounting Office (GAO), this investment scheme would
cost the federal budget as much as $19.1 billion in future interest
payment subsidies while doing little to improve passenger rail
service.2

By
Amtrak's own admission, the money provided by this misnamed High
Speed Rail Act would be nothing more than "an important first step
in providing seed money and building the partnerships with states,
localities, and freight railroads critical to high speed rail in
the United States."3 At a time when America is
confronting one of its greatest challenges to its security, as many
as 58 Senators and 177 Representatives have already signed on to
this effort to divert $19 billion of the remaining surplus to partnership-building seed money on behalf
of an enterprise that carries fewer than 1 percent of America's
inter-city passengers.

Within weeks of the terrorist attacks,
Amtrak floated a supplemental bailout proposal for an immediate
cash infusion of $3 billion,4 allegedly as compensation
for expenses incurred as a consequence of the terrorist attack.
Notwithstanding the fact that the rail line incurred no damage
during the attack, either direct or indirect, and that it is one of
the few operations other than blood donor centers to receive a
temporary boost in customers, Amtrak has adopted the pose of victim
in an effort to extract a taxpayer subsidy amounting to $1 billion
more than its annual revenues in FY 2000.5

A Better
ApproachCongress should reject these and other costly proposals to
prop up America's federally supported passenger rail system and
instead impose upon Amtrak a series of reforms that will lead it
swiftly to break-even operations. Chief among the needed
reforms:

Replace
Amtrak's management and board of directors with experienced
transportation professionals possessing a successful track record
of performance, as required by the Amtrak Reform and Accountability
Act of 1997 (P.L. 105-134).6

Encourage the new management to review
Amtrak's entire route structure, as recently proposed by U.S.
Secretary of Transportation Norman Mineta and Representative John
Mica (R-FL). Routes that make little transportation sense but
require substantial subsidies of as much as $3 for every dollar of
ticket revenue earned should be eliminated.

Mandate
that Amtrak's new management aggressively pursue the types of
cooperative arrangements with the private sector that have been so
successful in reforming passenger rail in Europe and Asia,
including privatization, competitive contracting, and
public-private partnerships.

How the Costly Bailout Plan Would
Work
The proposed High Speed Rail Act of 2001 would create a new type of
federally subsidized bond that Amtrak could use to borrow as much
as $12 billion in interest-free loans over the next 10 years, for
terms of up to 20 years. Rather than receive interest payments from
Amtrak, holders of these bonds would receive an annual federal tax
credit equal to what the loans would otherwise pay in interest. In
effect, Amtrak's lenders would be able to reduce their federal tax
burden by an amount equal to the interest payment they would be
entitled to receive on the loan. The U.S. Treasury, not Amtrak,
would be paying the interest.7

For
example, at a 7 percent interest rate, an individual investor
holding $10,000 in Amtrak bonds would be entitled to a $700 tax
credit in each of the 20 years covering the bond's term to
maturity. This means that if the investor owed $5,000 in federal
income taxes in a given year, the $10,000 in bonds would reduce the
investor's tax obligation to $4,300.8 The GAO estimates that the
$12 billion in such bonds that the bill would authorize over the
next 10 years would cost the budget as much as $19.1 billion in
forgone tax revenue.

How the Money Would Be
Wasted
Despite Amtrak's federal subsidies of more than $500 million each
year and a one-time special "tax refund" for capital investment of
nearly $2.3 billion paid out over 1998 and 1999, Amtrak remains in
serious financial trouble. With few unencumbered assets to borrow
against and annual losses exceeding the $521 million subsidy it
will receive this year as well as next, Amtrak will likely be
insolvent by next summer. Indeed, it would probably be insolvent
now had it not just borrowed $300 million in operating funds
against its ownership stake in New York's Pennsylvania Station.
Further reflecting worsening financial problems, in August 2001
Amtrak announced a 15 percent reduction in the number of managers
and the possibility of a 10 percent cut in the number of unionized
employees.

Amtrak is quick to point out that its
ridership recently has been increasing, but such gains are a
burden, not a benefit, because Amtrak's management has designed a
self-destructive cost-revenue relationship that yields higher
losses at higher ridership levels. Amtrak incurs about $2 in costs
for every ticket dollar sold, so the more it sells the more it
loses. Its record loss of $944 million in FY 2000 beat the previous
record of $916 million in 1999; and these bookkeeping measures of
failure will likely be topped by Amtrak's projected FY 2001 losses,
estimated to be running almost 5 percent above those of the same
period a year ago.9 If that trend continues for
the remainder of the year, Amtrak will lose an estimated $985
million during this fiscal year--almost twice this year's federal
subsidy of $521 million.

Under the circumstances, the $1.2 billion
in additional annual borrowing that the High Speed Rail Act would
allow is nothing more than a thinly disguised means to address a
cash flow crisis that threatens Amtrak's existence. The bill's
proposed borrowing authority is described as limited to
facilitating high-speed train travel, but few meaningful limits are
actually imposed. As a result, the borrowed funds could be
redirected to closing the $500 million gap between Amtrak's
billion-dollar losses and this year's federal subsidy.

Although Section 54(d)(1)(C)(iii) of the
bill would permit the issuance of these bonds only at the approval
of the Secretary of Transportation, and only then for the purpose
of funding projects identified and approved by the Department of
Transportation (DOT), later parts of that section--(4)(A), to be
precise--define "qualified projects" so broadly as to cover much of
what Amtrak already does. Moreover, the project does not have to be
connected with an action that leads to higher running speeds,
because the bill defines as a qualified use of funds such projects
as "station rehabilitation," an investment that would not
contribute to faster trains.

Further undermining the promise of
high-speed travel is the fact that the amount of borrowing
permitted by this bill, even at a grand total of $12 billion, is
substantially less than the sum needed to provide genuine
high-speed rail, i.e., trains that can hit top speeds of 200 mph
and that run at average speeds well above 100 mph over an entire
route, as is the case with Japan's Shinkansen or "Bullet" train (with average
speeds of 115 mph to 170 mph, depending on the route) or France's
TGV (with average speeds of 140 mph to 160 mph, depending on the
route).10
Indeed, as noted earlier, Amtrak admits as much when it describes
the $12 billion in loans as "seed money."

The
much heralded but troubled Acela, posing as a high-speed service in
the Northeast Corridor, is capable of top speeds of 150 mph on only
18 miles of track, but because of poor quality road bed and track
congestion, it is held to an average speed of only 66 mph between
Boston and New York--the speed most automobiles can sustain on the
same route using Interstate 95. To achieve the kind of passenger
train speeds reached on the best lines in Europe and Japan along
the 10 prospective high-speed rail corridors identified by the DOT
(plus the Northeast Corridor) would require substantially more than
the $12 billion proposed in the High Speed Rail Act. In January
2001, Amtrak acknowledged this fact when it reported that it would
most likely need $30 billion more to accomplish the task.11

A
recent proposal, known as Ride-21 and supported by House
Transportation Committee Chairman Don Young (R-AK), argues for $70
billion in subsidized rail infrastructure loans, which the chairman
believes would be necessary to support high-speed rail in
America.12
In July 2001, the GAO estimated the cost of improving the Northeast
Corridor and the 10 proposed high-speed rail corridors at between
$50 billion and $70 billion;13 in September, the chairman
of the Amtrak Reform Council estimated the cost to be $100
billion.

Evidence of Real
CostsEven the $100 billion estimate might be inadequate to
support high-speed rail in the United States, considering what
other countries have already spent to provide faster and more
extensive passenger rail service.

The Japanese National Railroad, for
example, which serves a land mass equal to just 4 percent that of
the United States,14 had incurred debt of more
than $300 billion and required annual operating subsidies in excess
of $6 billion by the mid-1980s when the government abandoned its
commitment to socialized rail service and began to reform and then
privatize the system.15

France, whose borders encompass the
equivalent of just 6 percent of the U.S. land mass, is expected to
spend a total of $50 billion on its TGV network; the entire French
rail network is currently losing $3.2 billion per year while
carrying a long-term debt load equal to about $20.1 billion.16

Given the comparatively high costs
incurred to serve rail markets in a land mass that is a tiny
fraction of America's, the $50 billion to $100 billion cost
estimates that rail advocates have endorsed appear to be much too
low.

Better Ideas Emerge
Notwithstanding Amtrak's promise to meet the 2003 goal of financial
self-sufficiency mandated by the Amtrak Reform and Accountability
Act of 1997, the rail service has no prayer of even coming close.
Congress should use what little time is left before the 2003
deadline to set in motion a series of reform initiatives to impose
on Amtrak when it fails to fulfill its legal obligation.

In
considering options for reform, Secretary of Transportation Norman
Mineta, now a member of Amtrak's board, offered a promising start
when he observed earlier this year that Amtrak should "look at
selected routes rather than blanket the country with rail service
that is not...really viable."17

As
the GAO discovered in auditing the 40 routes Amtrak operated in
1998, all but one--the Metroliner--had lost money, and some lost
substantially more than others.18 Significantly, whereas
Amtrak has emphasized the recent increase in ridership as one
measure of its success, all of that increase is attributable to the
Northeast and West Coast corridors, where boardings have increased
almost 19 percent to 17 million since the 1996 low point in rail
ridership. In contrast, on the inter-city routes where Amtrak loses
most of its money, ridership remains flat at 5.5 million per
year--about the same number of passengers leaving from the Kansas
City airport each year.

Fortunately, some in Congress have
recognized this situation and are urging new leadership at the
railroad and a restructuring of Amtrak's routes to bring costs in
line with revenues and with passenger interest. Following the
critical March 2001 report by the Amtrak Reform Council,19 House
Transportation Committee Chairman Don Young echoed earlier Heritage
Foundation proposals20 when he noted:

The
Amtrak Reform Council's comprehensive report confirms that Amtrak
is nearing the failure point in its effort and will continue to
fail without substantive and immediate changes in its management
and administration.21

In
August 2001, following extensive hearings into Amtrak's problems,
Representative John Mica, a member of the Transportation Committee,
recommended that potentially profitable routes such as the
Northeast Corridor be separated from the rest of the system to
create a financially viable transportation enterprise that is free
of taxpayer subsidies and operated by the private sector.22

Representative Mica's plan also includes
the proposal that the more scenic coast-to-coast routes be offered
on a competitive basis to tour operators that cater to the
lucrative leisure travel market. For the rest of the routes that
have limited tourist potential and no meaningful inter-city
mobility value, and where most of Amtrak's financial losses occur,
he proposes to offer them to the states they serve to fund and
operate if they wish or to private-sector operators.

In
making this proposal, Representative Mica drew upon successful
passenger rail reforms in other countries that turned to the
private sector to restructure and operate their once inefficient
government-operated rail systems. Where such reforms have been
introduced, subsidies have been reduced, service improved, and
ridership increased.

Options for Success
With Amtrak facing the prospect of financial failure within the
next six to 12 months, it is likely that the congressionally
mandated goal of financial self-sufficiency by 2003 will be missed
by a wide margin. In anticipation of this failure, Congress and the
President should begin the process of redirecting Amtrak toward
better service and lower-cost operations.

Examples of
Privatization SuccessOne way to achieve this goal is to require Amtrak to
implement some of the privatization techniques that Great Britain,
Japan, Australia, Argentina, and New Zealand have applied with
considerable success beginning in the 1990s. Japan, for example,
began selling off portions of its passenger rail system early in
that decade, and all are now operating at a profit. Also in the
1990s, Australia and New Zealand privatized passenger rail service,
and their systems are also profitable.

In
reforming their inefficient rail systems, both Great Britain and
Argentina adopted the "concession" or franchise approach under
which the government maintains an ownership interest in the system
but "sells" the right to operate service over specific routes for
specific intervals of time. Private operators compete for these
route rights by offering the highest lease payment or the lowest
subsidy. As a result of improved service from the more efficient
private-sector concession winners, Great Britain in 1999
experienced its highest rate of rail ridership since 1947.23 More
recently, Germany has implemented the concession system on several
of its commuter rail lines.

Although much of the current discussion of
rail privatization trends focuses on recent activities occurring
abroad, it should be remembered that the first successful rail
privatization (and largest privatization up until that time)
occurred in 1987 in the United States when the federal government
sold its 85 percent ownership stake in the freight railroad Conrail
to private investors for a combined payment of $1.9 billion. As a
result of better management following its privatization, Conrail's
value increased more than fivefold between 1987 and 1998 when it
was acquired by CSX and Norfolk Southern for $10.3 billion.

Although some contend that Amtrak would
not receive the same level of investor interest as seen by Conrail
or the systems in Europe and Asia, there is every reason to believe
that a number of serious proposals from qualified bidders would be
received if the federal government expressed an equally serious
interest in considering them. Indeed, formal expressions of
interest from U.S.-based investors were made prior to the 1997
enactment of the Amtrak Reform and Accountability Act, which
subsequently took Amtrak "out of play" for at least five years by
guaranteeing substantial federal subsidies through 2002. In
mid-1997, for example, President Bill Clinton's Secretary of
Transportation Rodney Slater received a letter from the president
of the Massachusetts-based Guilford Transportation Industries
requesting a meeting to:

immediately begin negotiations with your
department as leinholder, for the sale or lease of the Northeast
Corridor. Our company is prepared to purchase or lease the rail
line and operate private passenger service throughout the
corridor.24

With
the congressionally mandated five-year rehabilitation period coming
to a close, and with Amtrak showing less promise of
self-sufficiency now than when it entered the period, several other
qualified investors and transportation companies are putting
together prospective offers that may soon be made formal and public
if some official encouragement is forthcoming.

Washington's Response
The costly proposals that have been put forth to prop up Amtrak
should be rejected, and Congress should instead impose upon Amtrak
a series of reforms. Chief among these reforms:

Replace Amtrak's
management and board of directors with experienced transportation
professionals, who possess a successful track record of
performance, as required by the Amtrak Reform and Accountability
Act of 1997. New management is essential given the current Amtrak
board's record of poor performance, limited business experience,
and resistance to innovation.25

Encourage the
new management to review Amtrak's entire route structure,
a reform recently proposed by Secretary of Transportation Mineta
and Representative Mica. To bring route selection in line with
revenues and passenger interest, routes that make little
transportation sense but require substantial subsidies of as much
as $3 for every dollar of ticket revenue earned should be
eliminated.

Mandate that
Amtrak's new management aggressively pursue cooperative
arrangements with the private sector. Examples of
arrangements are those that have been so successful in reforming
passenger rail in Europe and Asia, including privatization,
competitive contracting, and public-private partnerships.

CONCLUSION
Given the many successes experienced both at home and abroad in
reforming financially troubled rail systems with varying degrees of
private-sector participation, any review by the Bush Administration
of proposals that might be adopted as remedies for the ailing
passenger rail service should be as wide and open as possible, and
emphasize that options for private-sector participation will be
welcome. To facilitate the widest possible review and to stimulate
the development of innovative solutions, the Administration should
encourage interested parties--whether from the private sector, the
financial community, the unionized work force, Congress, passenger
associations, hobbyists, or current management--to submit proposals
that could lead to better passenger rail service at lower cost, or
at no cost at all to taxpayers.

In
effect, and in appreciation of the approaching date for Amtrak's
required financial self-sufficiency as set by the Amtrak Reform and
Accountability Act of 1997, the Administration would be fostering a
national citizen symposium on the future of national rail passenger
service in America. All options should be discussed and subjected
to expert analysis and scrutiny. In the end, as opinion and support
coalesce around one or a few options that seem more viable than
others, Congress and the Administration would have valuable
guidance on what steps should be taken next.

Dr. Ronald D. Utt, is a
Senior Research Fellow in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.

1.The High Speed Rail Act
of 2001 is not to be confused with the Rail Infrastructure
Development and Expansion Act for the 21st Century (RIDE-21)
proposed by House Transportation Committee Chairman Don Young on
September 6, 2001. Chairman Young's proposal would subsidize as
much as $70 billion for rail infrastructure investment over the
next 10 years, but it would exclude Amtrak from directly receiving
any funds from these loans.

5.In comparison to the
proposed $3 billion bailout, Amtrak earned total revenues of $2.1
billion in FY 2000--just two-thirds of the subsidy it seeks. In
contrast, the also questionable airline bailout of $5 billion
amounted to about two weeks of revenue for the airline
industry.

8.Although the tax credit
in this example would be $700 to this hypothetical lender, the
overall net reduction in the tax obligation would be somewhat less
than $700 depending upon the bondholder's marginal tax rate. This
difference is a result of the bill's requirement that the value of
the credit also be added to the lender's adjusted gross income. In
the case of a borrower in the 30 percent tax bracket, the addition
of the $700 credit to adjusted gross income would increase the tax
obligation by $210, yielding a net tax reduction of $490.

9."Amtrak's Financial
Performance and Requirements," statement of the Honorable Kenneth
M. Mead, Inspector General, U.S. Department of Transportation,
before the Subcommittee on Railroads, Committee on Transportation
and Infrastructure, U.S. House of Representatives, 107th Cong., 1st
Sess., July 25, 2001.

10.Germany also has a
high-speed service called the InterCity Express, which averages in
the 80 mph range over most of its routes. In June 1998, one of its
trains derailed in Eschede, Germany, killing 101 passengers. See
Glen Johnson, "High Speed Trains Hitting Road Blocks,"
Fredericksburg Free Lance Star, January 26, 1999, p. B5.

12.Ride-21 Proposal, a
Power Point demonstration provided by the House Transportation
Committee on September 6, 2001. See also Don Phillips, "GOP Plans
$71 Billion Rail Bill," The Washington Post, September 7,
2001, p. E1.

14.These comparative land
mass calculations include Alaska because RAIL-21 requires that the
Alaska Railroad have access to a portion of the $70 billion to be
made available.

15.Louis S. Thompson and
Helene Stephan, "Infrastructure Separation: What Have We Learned So
Far?" Business Rail Report, 1998, p. 14.

16."World Class in Both
Speed and Losses: France's Expensive Toy," The Economist, May 31,
2001. Amtrak, however, contends in its Strategic Business Plan that
the French spent only $2 million on the TGV, a figure that is
inconsistent with French reports to the European Commission.